The sale of the downtown Vancouver Bentall office portfolio, announced March 27, could drive commercial real estate velocity in B.C. to near or above the record level of 2018. The sale price of the four-tower landmark office complex in downtown Vancouver has not been released but is expected to be near the $1.06 billion paid for the site three years ago.
Business in Vancouver’s Biggest Real Estate Deals of 2018 list chronicles a year that rang in $6.5 billion in 202 commercial and industrial sector transactions, according to commercial agency Avison Young. This was down from the unprecedented volume of $7.5 billion in 2017, when 232 properties sold.
Avison Young noted that a widening bid-ask gap was already becoming apparent in 2018’s last half as investors and lenders began to “recalibrate investment objectives.”
This could be related to rising interest rates and a near collapse of Metro Vancouver residential sales, because many large land deals last year hinged on the potential for lucrative, high-density residential development.
“A substantial decline in the number of deals completed is forecast for the first half of 2019,” according to Avison Young's Year-End 2018 BC Real Estate Investment Review.
The report suggest prices will remain high for prime office, retail and industrial assets, but buyers and lenders will be costing out the yields “with less emphasis on the speculative aspects” of redevelopment.
At least seven of 2018’s biggest deals were based on residential development speculation. These include:
•U.K.-based Harlow Holdings Ltd.’s $164.7 million purchase of a one-third-acre multi-family site in Vancouver’s West End;
•two “strata windups” in Vancouver with a total value of $324 million; and
•the sale of a parking lot on Seymour Street to mixed-use residential developer Reliance Properties Ltd. for $131.3 million.
Industrial transactions, which accounted for 40% of 2018’s big deals, were worth almost $1.2 billion, just down from the peak of 2017.
In 2018, Metro residential land sales hit $627 million, which would be an all-time high were it not for the spike during 2016 and 2017 when sales crested the $1.1 billon mark for the first time.
The downward shift began in 2018’s last half, as an avalanche of government policies, interest rate hikes and a subsequent 40% plunge in housing sales hammered developer and consumer confidence, said Casey Weeks, senior vice-president of investment at Colliers International.
Weeks added that the mortgage stress test and other regulations have also slashed the pre-sales that condo developers depend on for financing.
He forecasts that some planned condo projects from smaller developers won’t proceed, which in turn could affect speculative sales of potential development sites this year.
The average cost for every buildable square foot for a residential development in Vancouver is now between $450 and $550. Vancouver has by far the highest combined per-buildable-square-foot costs and construction costs in Canada, according to Altus Group’s 2019 Construction Cost Guide.
Sales of all types of land, including commercial holding property and residential land assemblies, started slowing late in 2018, reported the Real Estate Board of Greater Vancouver. Tracking transactions through B.C.’s land titles, the board found that land sales in the third quarter of 2018 had fallen 34.8% from the same period a year earlier and the value of total land sales had dropped by nearly 15%, to $2 billion.
BIV lists the $248.7 billion transaction of an industrial portfolio by the Vancouver Fraser Port Authority as the biggest industrial deal last year.
Much of the industrial action, however, is in speculative warehouse and distribution tied to the retail sector, including the 1.1-million-square-foot Xchange business park in Abbotsford by Hungerford Properties and QuadReal Property Group, developed on speculation and proposed for completion late next year.
But a “major deceleration of retail sales growth” from 9% in 2017 to 2% last year is among the reasons the BC Real Estate Association (BCREA) cites for an expected “flattening” of commercial and industrial real estate investments in 2019.
The BCREA also points to a fourth-quarter drop in manufacturing shipments and employment as red flags for industrial real estate. The association’s much-watched Commercial Leading Indicator index saw its first drop in nine years as 2018 ended, down one point from a year earlier.
Hudson Pacific Properties Inc. (NYSE) has bought the Bentall Centre office and retail portfolio in a joint venture with an affiliate of Blackstone Property Partners. Hudson Pacific will own 20% of the joint venture and be responsible for day-to-day operations and development. Blackstone will own 80% and serve as the managing partner. The 1.45-million-square-foot transaction is expected to close in 2019’s second quarter. CBRE in Vancouver is the broker agent on the transaction, which is rumoured to have topped $1 billion.•